Ramanagaram Financial Diaries: Loan repayments and cash patterns of the urban slums

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Ramanagaram Financial Diaries Loan repayments
and cash patterns of the urban slums Rajalaxmi
Kamath1 Arnab Mukherji Smita Ramanathan IIMB
Working Paper No. 268 dated 11/03/08
1 Rajalaxmi and Arnab are Assistant Professors
at the Center for Public Policy, while Smita is a
Research Associate with the Microfinance Group,
all based at the Indian Institute of Management
Bangalore. Please send comments to rajalaxmik at
iimb dot ernet dot in Basic information about
Ramanagaram is available at http//www.ramanagara
city.gov.in/ Funding for this research is
provided by the Microfinance Management Institute
(MFMI) through the Microfinance Group, Indian
Institute of Management, Bangalore. We are
thankful to Prof. R. Srinivasan of the
Microfinance Group, Indian Institute of
Management, Bangalore. We acknowledge the
research assistance by Ms. S. Rathna, and are
indebted to the gutsy women from Hajinagar and
Ambedkarnagar at Ramanagaram for sharing their
time with us. The usual disclaimer applies.
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Background for this pilot study

• Several shortcomings of snap-shot surveys of
  financial flows among the urban poor and the need
  felt for a more intensive methodology
• Understand the requirements of the financial
  diaries methodology
• Preparatory study for a bigger, year-long project
  beginning May 2008

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Motivation for this study

• Use the financial diaries to understand the cash
  inflows and outflows of households residing in
  the urban slums AND using the two predominant
  models of microfinance services the MFIs and
  the SHGs
• Study period on a pilot basis for three months
  from Oct 2007 to Dec 2007

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Methodology and some learnings

• Diaries required to be written by the households
  themselves
• Recruitment problems incentives, co-operation
  of husbands, TIME
• Level of detail to be kept best left to the
  households
• 3 baseline surveys First socio-economic
  information of the households (beginning)
  second annual income-expenditure information
  third savings, borrowings and use of financial
  instruments (end)

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Sample Description

• For sample design, the minimum requirement was
  for the household to be a member of a MFI or a
  SHG
• Began with 23 households residing in the
  Hajinagar and Ambedkarnagar slums of Ramanagaram,
  Karnataka. 3 households dropped mid-way due to
  personal reasons
• Households engaged in filature, selling fruits,
  trading in metal scrap, coolie-work,
  beedi-rolling, making footwear, working on the
  municipality rolls as sweepers
• Wide variance in reported incomes (most
  households were above the official poverty line
  of Karnataka)
• Assets owned by the households TV, mobile
  phones, VCD players, small amounts of jewellary

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Preliminary Results I Multiple Memberships
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Multiple Memberships some explanations

• Unintended result of our study i.e. did not go
  looking for it
• fallout on the outreach data given for MFIs and
  SHGs (sa-dhan and Nabard data)
• How representative is our sample to push forth
  this result?
• Consequences in terms of transactions costs for
  borrowers
• Some reasons for multiple membership

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Preliminary Results II Burden of Loan Repayments
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Burden of loan repayments some explanations

• Loan repayments vying with food-expenditure in
  the weekly budgets of households
• 10 out of the 20 households spend a higher
  proportion of their expenditure on loan
  repayments than on food
• 11 households spend greater than 30 percent of
  their total expenditure on loan repayments
• over-lending by MFIs or over-borrowing by
  households?

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Preliminary Result III The use of microfinance
loans
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Episodes of Borrowing for the Diary period
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The use of microfinance loans

• Money being fungible, the actual use of
  microfinance loans can be different from the
  stated purpose for which the loan was obtained
• Closely tracking household transactions around
  the period of the loan is the only way to find
  the actual use something which financial
  diaries allows us to do
• For each borrowing episode above Rs. 500 (of
  which there were 41), we defined a 7 day band - 3
  days prior and 3 days post the borrowing episode
• The expenditures done in this band were most
  likely to be (a) financed by the borrowings or
  (b) done in expectation of the borrowing

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The use of microfinance loans

• 55 expenditure episodes for amounts greater than
  Rs. 500 in these time bands
• 5 expenditure episodes coincided with the day of
  the borrowing, and were found to be household
  spending on clothes, jewellary and accessories
  for the festival of Ramadan

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The use of microfinance loans
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Uses of microfinance borrowings
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Preliminary Result IV Level of indebtedness of
the households

• For the survey period, all households except two
  had a surplus of income over expenditure
• 14 households also had expenditures excess of
  gross inflows (borrowings incomes)
• Festival related expenditure (survey period
  coincided with the festivals)
• Sustainability of this debt?

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Conclusions - I

• Worrying trends that could be of concern to the
  microfinance sector at large
• Households borrowing from multiple MFIs / SHGs
  apart from informal private sources
• Underprovided in terms of the size of loans that
  they receive from a single source
• Expensive in terms of time and effort

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Conclusions - II

• 60 percent of the household budgets is spend only
  on food and servicing existing loans
• Recycling of debt borrowings used to repay
  various kinds of borrowings, including MFI and
  SHG borrowings
• Some evidence to suggest that avenues to invest
  in micro-enterprises or other economic activities
  is rather constrained
• The fact that most of these borrowings are taken
  as small sums from various entities also does not
  boost the use of these funds for productive
  purposes

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Thanks and suggestions